Money markets us repo rates dip with reduced cash needs

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U.S. repurchase agreements, a key source of short-term funding for Wall Street, fell on Tuesday as bond dealers' cash needs declined after they paid for their purchases of Treasuries supply last week. The rate on repos secured by Treasuries was last quoted at 21 basis points midmarket, down from 23 on Monday. The elevated level of Wall Street borrowing costs has stoked expectations the Federal Reserve might lower interest on excess reserves and/or slow their selling of short-dated Treasuries. Fed Chairman Ben Bernanke, in testimony before the Senate Banking Committee on Tuesday, offered few new clues on whether the U.S. central bank was moving closer to a fresh round of monetary stimulus, but repeated the Fed's pledge to act if needed. The Treasury last week auctioned $66 billion of 3-year and 10-year notes and 30-year bonds. Money market fund managers have their fingers crossed in hopes the Fed does not follow the European Central Bank and lower the interest rate it pays on excess reserves to banks, as they believe such a move would cause disruptions in funding markets, especially money market funds. Demand for euro zone treasury bills has surged since the ECB cut its deposit rate to zero last week as buyers who focus on short-term debt look to secure what little yield remains by moving into longer-term and lower-rated investments.

Belgium, whose highest credit rating is AA, on Tuesday became the latest euro zone sovereign to sell short-term debt at a negative yield, issuing three-month bills at a yield of minus 0.16 percent. Triple-A rated France, Germany and the Netherlands have all sold T-bills at negative yields in the past week, as has the euro zone's EFSF temporary rescue fund, which is backed by state guarantees. Investor appetite for low-risk assets is already at an all-time high with dwindling confidence in the euro zone's ability to haul itself away from the brink of break-up and the global economy struggling to grow.

But analysts said last week's ECB cut in the rate it pays on overnight deposits to zero had triggered a new spike in demand. The knock-on effect has seen overnight rates fall, pushing some of the most secure banks to offer a negative yield on certificates of deposit, which are widely used by the most risk-averse asset managers such as central banks and money market funds."Banks are now charging for the privilege of placing money with them ... which is pushing many investors to seek alternative areas in which to effectively park their money," said Richard McGuire, strategist at Rabobank in London. The resultant boom in demand for yield was causing convergence in rates on treasury bills - debt with a maturity of less than two years - among Europe's highest rated issuers.

Germany issued six-month bills last week at an average yield of minus 0.034 percent, while on July 16 France sold 23-week bills at a cost of minus 0.005 percent - a difference of around 3 bps. At similar sales a month earlier the gap between the two auction yields was 12.5 bps."To me, this is investors saying 'I'm actually getting capital destruction in the safest assets, so I'm going to move out along the credit curve and the term structure a little'," said Thushka Maharaj, a vice president in the Credit Suisse European interest rate strategy team in London."We are still expecting convergence between French and Netherlands T-bills toward the German yield; in the front end the spread is about 20 basis points so there's still room there," Maharaj said. The search for higher-yielding assets has also pushed down the cost of short-term borrowing for the likes of Spain and Italy - both on the frontline of the region's debt crisis. Spain on Tuesday sold 12- and 18-month bills at around a percentage point lower cost than last month. However, analysts said the 3.92 percent and 5.07 percent yields were still too high to say markets believed the country's finances were on a sustainable path. The U.S. Treasury on Tuesday sold $30 billion of 4-week bills at a high rate of 0.075 percent, up slightly from 0.07 percent in a similar sale last week.